Pengantar Ekonometrika Terapan

Introduction to applied econometrics
Rus’an Nasrudin
Feb 6, 2020
Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 1 / 23

What is econometrics
‘ Econometrics may be defined as the quantitative analysis

of actual economic phenomena based on the concurrent de-
velopment of theory and observation, related by appropriate
methods of inference.’ Paul Samuelson

What is causal inference
‘Causal inference is often accused of being a-theoretical, but

nothing could be further from the truth [Imbens, 2009, Deaton
and Cartwright, 2018]. Economic theory is required in order
to justify a credible claim of causal inference. And economic
theory also highlights why causal inference is necessarily a
thorny task.’ Cunningham

Why econometrics?
Economist always interested in examining relationships between

variable
For example, identifying price elasticity of demand
For what? Business entity makes planning, government makes
policy
To do so, what economists do? Collect data, run a regression and
do hypothesis testing, interpret the result and so on..
This is econometric task

Example: estimating price elasticity of demand
We start we the curiosity from theory: Marshallian demand

function
From the prescription we know that quantity demanded is a
function of price, price of other goods, income, etc..
We then collect data on these variables
Estimate the logaritmic form of quantity on logaritmic form of price
etc
We get the elasticity measure

The objectives of this course
Course objectives
This course intends to stimulate your interest in empirical work

using a modern approach of econometric
Modern? Yes it is
Was there any old econometrics? Knowledge is always a precious
one
Yet, econometricians, statisticians find that some refinement and
new knowledge emerges
We came into era when the econometric work is at the
enthusiasm to identify causality
Specifically, to make causality that is differ from correlation

What makes correlation differs from causation?
Let’s watch this interesting Ted Talk:

https://www.youtube.com/watch?v=8B271L3NtAw&t=15s

Course outline
1 Introduction to econometrics
2 Review of mathematical statistics and probability theory
3 Regression theory
4 Least square
5 Inference
6 Impact evaluation with OLS
7 Omitting variable bias and how to use control
8 Conditional independence assumption
9 Double Difference (DD) regression
10 DD application
11 Instrumental variable (IV) regression
12 IV Application
13 Standard error topic
14 Review
What and why causation
Motivation
Economist have always been interested in eliciting impact of

something on something else
Knowing this impact is important to make some great decision
For example, as social planner I want to choose either give
income transfer unconditionally or conditionally to eligible citizens
In Indonesia, we have options: BLT or PKH
If the aim of the social assistance is to boost vital outcome such
as health and education, knowing the difference between the two
in terms of effectiveness, is important

Ceteris paribus
How do we complete this task?

In the language of economics, if we want to test a pure effect of X
on Y, we hold everything other than X to be constant
By this, we ensure that the induced effect on Y is must be coming
from X
We call this approach ceteris paribus, holding everything else
constant
Otherwise, we cannot separate which one is the effect of X and
which one is from other than X
In a real world of human beings with real activities, ceteris paribus
is almost imposible

Let’s come back to elasticity example

Consider this graphic from Philip Wright’s Appendix B [Wright,
1928] of Cunningham (2018)

Let’s come back to elasticity example
The price elasticity of demand is the solution to the following

equation
∂logQ
=
∂logP
in which we expect to hold supply fixed, the prices of other goods
fixed, income fixed, preference fixed, input cost fixed etc.
We need P that is truly indenpent, which is fulfiling ceteris
paribus notion

Experiment and observational data
But wait, why not to follow the approach used by Physicians or

Medical researchers?
What? Yes it is. Let’s make an experiment and use human being
as the subject in the experiment and make sure that the ceteris
paribus holds
It seems possible.
Yes, that’s way many great development economists now use this
approach. It is called randomised control trial (RCT)

Do you familiar with these faces?
Yes, they are.

RCT influence on econometrics and the doubt about

endogeneity
With observational data, as we formally call it, such as household
survey (SUSENAS, IFLS, RISKESDAS):
Any variables extracted from respondent are not in a fulfilment of
ceteris paribus
Everything moves, within human being interest, maximisation of
bunch of things
We called them endogenous variables
Indeed, what we want is an exogenous variable
Up to this point, I hope it is clear enough that now RCT is a golden
standard in studying the econometrics of causality (the impact of
something on something)
Techniques that prone to bias (not only the effect of X) because
we use endogenous variable is called suffered from endogeneity
problem
Quasi-experiment and natural experimental data
Is that experiment in the lab or field is the only avenue to do a

modern econometrics?
No. There are chances for observational data, as long as it closes
enough to make any variable of interest (the X) is exogenous
So, what is the requirement for X that comes from observational
data can be exogenous?
Let’s start with explaining litle bit what is regression

Regression
In examining the relationship between Y and X, economist
estimates the following equation
Yi = α + βXi + εi
β is the measure of the effect of X on Y, while εi is anything that
we don’t know for the value of apart from explanation done by X.
At weaker notion, everything in ε is held constant is similar to have
situation of that X and ε is not related when we want to know effect
X on Y
We call X like this is a random X
And a random X could come from some quasi or natural
experiment events, for example X is a natural disaster or a policy
event that are totally sursprising and not anticipated by individuals
and so on.
Types of data that we use
What are types of data
To sum up, when working with empirical task, we face three types of
data
Experimental data: this is ideal data to establish causality as we
generate X and ’isolate’ everything else other than X (we will
come back into this topic later)
Observational data: be careful with this type of data, it is
susceptible to endogeneity problem
Quasi-experiment or natural experiment data: it gives us chance
to get an exogenous X variable

Example of experimental data

Example of quasi-experimental data



Reading time
Let’s have a look on these articles, and talk about it in terms of
econometrics:
Banerjee, Abhijit, et al. ”Private outsourcing and competition:
Subsidized food distribution in Indonesia.” Journal of Political
Economy 127.1 (2019): 101-137.
Burke, Paul J., Tsendsuren Batsuuri, and Muhammad Halley
Yudhistira. ”Easing the traffic: The effects of Indonesia’s fuel
subsidy reforms on toll-road travel.” Transportation Research Part
A: Policy and Practice 105 (2017): 167-180.
Sparrow, Robert, Asep Suryahadi, and Wenefrida Widyanti.
”Social health insurance for the poor: Targeting and impact of
Indonesia’s Askeskin programme.” Social science & medicine 96
(2013): 264-271.

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Introduction to applied econometrics

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 1 / 23

‘ Econometrics may be defined as the quantitative analysis

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 2 / 23

What is causal inference

‘Causal inference is often accused of being a-theoretical, but

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 3 / 23

Economist always interested in examining relationships between

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 4 / 23

Example: estimating price elasticity of demand

We start we the curiosity from theory: Marshallian demand

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 5 / 23

This course intends to stimulate your interest in empirical work

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 6 / 23

What makes correlation differs from causation?

Let’s watch this interesting Ted Talk:

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 7 / 23

Economist have always been interested in eliciting impact of

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 9 / 23

How do we complete this task?

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 10 / 23

Let’s come back to elasticity example

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 11 / 23

Let’s come back to elasticity example

The price elasticity of demand is the solution to the following

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 12 / 23

Experiment and observational data

But wait, why not to follow the approach used by Physicians or

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 13 / 23

Do you familiar with these faces?

Yes, they are.

RCT influence on econometrics and the doubt about

Quasi-experiment and natural experimental data

Is that experiment in the lab or field is the only avenue to do a

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 16 / 23

What are types of data

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 18 / 23

Example of experimental data

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 19 / 23

Example of quasi-experimental data

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 20 / 23

Example of quasi-experimental data

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 21 / 23

Example of quasi-experimental data

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 22 / 23

Rus’an Nasrudin Introduction to applied econometrics Feb 6, 2020 23 / 23

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